A UNIQUE PERSPECTIVE ON THE ISSUES AND OPPORTUNITIESFACING INVESTORS IN PRIVATE EQUITY WORLDWIDE

Global Private Equity BarometerWINTER 2013-14

W I N T E R 2 0 1 3 - 1 42

Coller Capital’s Global Private Equity Barometer

Coller Capital’s Global Private Equity Barometer is a unique

snapshot of worldwide trends in private equity – a twice-yearly

overview of the plans and opinions of institutional investors in

private equity (Limited Partners, or LPs, as they are known) based in

North America, Europe and Asia-Pacific (including the Middle East).

This 19th edition of the Global Private Equity Barometer captured

the views of 113 private equity investors from round the world.

The Barometer’s findings are globally representative of the LP

population by:

Investor location

Type of investing organisation

Total assets under management

Length of experience of private equity investing

Contents

Topics in this edition of the Barometer include investors’ views

and plans regarding:

PE as an asset class after the financial crisis

Return expectations & appetite for PE

The risk of private vs public equity

The appropriate level of hurdle rates

The LP workplace

Expectations for capital calls & distributions

Direct investments & co-investing by LPs

The secondaries market

Regional PE markets

Venture capital & innovation

The debt markets

W I N T E R 2 0 1 3 - 1 4 3

PE more attractive to many investors since the GFC

Economic volatility has increased since the global financial

crisis (GFC) began. 44% of LPs believe this increased volatility

has made the PE asset class more attractive. Only 12% of

investors think private equity has become less attractive.

Target allocations to PE increase vs RE and hedge funds

37% of LPs plan to increase their target allocation to

private equity over the next 12 months, compared with

14% who plan to reduce it. LPs’ appetite for real estate

and hedge funds remains mixed, with fairly equal

proportions of investors planning to increase and decrease

their target allocations.

LPs’ planned changes to their alternative assets allocations over the next year

LPs’ views of PE since the financial crisis

PE has become more attractivePE has become less attractive

Respondents (%)

30%20%10%0%-10%-20% 40% 50%

Hedge funds

Private equity

0% 10% 20% 30% 40%-20% -10%

Respondents (%)

Decrease Increase

Real estate

(Figure 1)

(Figure 2)

W I N T E R 2 0 1 3 - 1 44

Almost all LPs are forecasting net PE returns of 11%+

Looking across their PE portfolios, 86% of LPs anticipate annual

net returns of 11%+ over the next 3-5 years – and a quarter of

LPs expect net returns of 16%+.

Buyouts in all regions of the world are regarded as the safest

bet – around four in five LPs expect net PE returns of 11%+.

LPs’ views of venture are more mixed – two thirds expect North

American venture to deliver 11%+ over the next 3-5 years (and

40% expect returns of 16%+). This compares with half of LPs

expecting 11%+ returns for Asia-Pacific venture, and one third

of LPs for European venture.

The ‘typical’ LP expects a 5% risk premium from PE over public equities

The ‘typical’ (median) PE investor expects a 5% risk premium

from private equity relative to public/quoted equities.

Institutional expectations vary by investor type – more than a

third of asset managers expect a risk premium of 6% or more

from private equity over public equity. This compares with one

quarter of insurance companies and 15% of pension funds.

Risk premium expected from PE over public/quoted equities – by LP type

(Figure 4)

LPs’ annual net return expectations from their PE portfolios over the next 3-5 years

(Figure 3)

Across whole PE portfolio

North American buyouts

North American venture

European buyouts

European venture

Asia-Paci�c venture

Funds-of-funds/generalist funds

Asia-Paci�c buyouts

Annual net returns

Length of each coloured bar indicates percentage of respondents with speci�ed returns (Each grey line interval = 10% of respondents)

Less than 5% 5-10% 11-15% 16-20% More than 20%

Asset manager

‘Typical’ (median)investor

Insurance company Pension fund

Risk premium of 1-4%

Risk premium of 5%

Risk premium of 6% or more

Resp

onde

nts

(%)

0%

10%

20%

30%

50%

60%

70%

80%

90%

40%

100%

W I N T E R 2 0 1 3 - 1 4 5

Lower PE returns since the GFC are a structural issue

Three quarters (73%) of LPs believe the reduction in PE returns

since the onset of the global financial crisis is partly structural,

rather than a purely cyclical phenomenon.

Hurdle rates should remain at around today’s level, LPs think

Hurdle rates were first agreed during a different economic era.

However, two thirds (62%) of LPs believe they remain fit for

purpose and that rates should be maintained at around current

levels for the next 5-10 years.

Many of the world’s largest investors plan to grow their PE teams

Half of sovereign wealth funds, 47% of insurance companies

and 44% of asset managers plan to increase the size of their PE

teams over the next 12-18 months. One quarter of public pension

funds plan to do the same. All endowments/foundations,

corporate pension funds and family office/private trusts plan to

maintain the size of their PE teams.

Factors behind the reduction in PE returns since the financial crisis

The ideal level of hurdle rates over the next 5-10 years compared with current levels – LP views

LPs planning larger private equity teams over the next 12-18 months

(Figure 5)

(Figure 6)

(Figure 7)

Structural tosome degree

(73%)

Purely cyclical(27%)

Much higher(3%)

Slightly higher(14%)

At abouttoday’s level

(62%)

Slightly lower(18%)

Much lower(3%)

0% 10% 20% 30% 40% 50% 60%

Sovereign Wealth Fund

Insurance company

Asset manager

Public pension fund

Endowment/foundation

Corporate pension fund

Family office/private trust

Winter 2013 Summer 2011

Respondents (%)

W I N T E R 2 0 1 3 - 1 46

Likely changes to the rate of GPs’ capital calls over the next 12-18 months – LP views

Likely changes to the rate of GPs’ distributions over the next 12-18 months – LP views

LPs’ policies towards PE-sponsored IPOs

LPs expect capital calls and distributions to accelerate

On balance, LPs expect the rate of GPs’ capital calls and

distributions to accelerate over the next 12-18 months. 42%

of LPs expect the rate of GPs’ capital calls to accelerate,

compared with 8% of LPs who expect the rate to decelerate.

Only one third of LPs invest in PE-sponsored IPOs

Two thirds of LP institutions avoid investing in PE-sponsored

IPOs. 21% of investors believe GP-sponsored IPOs are too

aggressively priced, and a further 46% of investors believe all

IPOs are overpriced. This feeling is strongest in North America,

where three quarters of LPs avoid IPOs.

Respondents (%)

GPs' capital calls will decelerate GPs' capital calls will accelerate

0% 10% 20% 30% 40% 50%-10%

GPs' distributions will decelerate GPs' distributions will accelerate

Respondents (%)

0% 10% 20% 30% 40% 60%50%-20% -10%

Our institution does not invest in IPOs –most are overpriced

(46%)

Our institution does not investin PE-sponsored IPOs –

most are overpriced(21%)

Our institution investsin PE-sponsored IPOs

(33%)

(Figure 8)

(Figure10)

56% of PE investors expect the rate of GP distributions to

accelerate over the next 12-18 months, compared with only

10% who expect the rate to decelerate. European LPs are most

confident about distributions – two thirds expect the pace to

accelerate, compared with just under half of North American LPs.

(Figure 9)

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A quarter of global LPs plan increased exposure to African PE

One quarter (24%) of global investors expect to begin investing,

or expand their investment, in African private equity over the

next 2-3 years.

LPs’ plans for African PE exposure in the next 2-3 years

LPs still increasing investment in small and mid-sized buyouts in Europe/North America

Investor sentiment by investment stage has changed little in the

last couple of years. LPs believe small and mid-market buyout

transactions in Europe and North America will offer the best

PE opportunities in the next 2-3 years – 30-40% of LPs plan to

increase their exposure to this kind of PE.

Investors are continuing to scale back their exposure to venture

capital and large buyouts investments – areas they see as more

risky in today’s climate. 30-40% of LPs plan to reduce their new

commitments to these areas over the next 2-3 years.

LPs’ plans for European and North American fund commitments in the next 2-3 years – by fund type

(Figure 11)

0% 20% 40%10%-10%-20%-30%-40%-50% 30% 50%

Respondents (%)

In North AmericaIn Europe

Large buyout funds

Mid-market buyout funds

Growth/expansion capital

Small buyout funds

Venture capital

Decrease exposure Increase exposure

Begin investing(16%)

Expand investment(8%)

Maintain investment (4%)

Decrease investment(1%)No plans

to invest(71%)

(Figure 12)

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Over half of LPs have co-invested with GPs in the last two years

Just over half of LPs (54%) have co-invested with their GPs in

the last two years. Only one in ten LPs had not been offered any

co-investment opportunities in this period.

Typical LP now has a tenth of PE commitments in directs

The ‘typical’ (median) LP currently invests 10% of its total

PE commitments directly into private companies (on a stand-

alone basis and/or via co-investment with GPs). Within the

next 3-5 years, this proportion is expected to increase to 15%.

Two thirds of North American LPs and half of European LPs say

they would like to be offered more co-investments.

Proportion of GP-offered co-investments accepted by LPs in the last 1-2 years

Proportion of investors desiring an increased number of co-investments – by location of LP

(Figure 14)

Our institution hasnot been offered

any co-investments(9%)

Our institutionhas accepted noco-investments

(37%)

Our institution hasaccepted most orall co-investments

(11%)

Our institutionhas accepted some

co-investments(43%)

North American LPs European LPs Asia-Paci�c LPs0%

20%

10%

30%

40%

50%

60%

70%

Resp

onde

nts

(%)

(Figure 15)

LPs expect a slight improvement in Japanese PE

Although a majority (58%) of investors believe recent economic

improvements in Japan will create more PE opportunities in the

country, most LPs believe the effect will be slight.

The expected impact of Japan’s recent economic improvements on Japanese PE

Signi�cantly morePE opportunities

(3%)

Slightly morePE opportunities

(55%)

No morePE opportunitieswithin 3 years

(21%)

No more PE opportunitieswithin 3 years – the problems

of Japanese PE go beyondthe economic cycle

(21%)

(Figure 13)

W I N T E R 2 0 1 3 - 1 4 9

LPs continue to change overall composition of their portfolios

42% of LPs plan to sell assets in the secondaries market in the

next two years. Investors continue to see the secondaries

market as an important tool for changing the overall

composition of their portfolios.

There are some striking regional differences among secondaries

sellers. Almost all North American would-be sellers (96%)

plan to re-focus resources on their best-performing GPs,

compared with just one quarter (27%) of European LPs. Half

of North American LPs plan to sell in the secondaries market

as a way to rebalance their portfolios – either within PE, or

between PE and other asset classes. Around one third of

European LPs plan to sell for these reasons.

Half of LPs think Europe’s weak VC sector will impact growth

Half (52%) of global LPs think the weakness of European

venture capital is a significant problem that will impact the

growth of the European economy.

Investment fit and investment case prompt most co-investment refusals

Two thirds of LPs declined one or more co-investment

opportunities because they fell outside their investment

strategy (eg, by deal size, geography, sector) in the last

two years. 54% of LPs refused a co-investment because

they considered the investment case made by the GP to be

unconvincing.

LPs’ reasons for declining co-investment opportunities in the past 1-2 years

The impact of a weak European venture capital industry on the region’s economy – LP views

(Figure 18)

The co-investment(s)were outside our

investment strategy

The investment casefor the co-investment(s)

was not convincing

The co-investment(s)were too small

We were unable tomeet the GP's timingfor the co-investment

0% 20% 40% 60%10% 30% 50% 70%

Respondents (%)

Suf�cient other sourcesof innovation/growth

�nancing willbe available

(48%)

Innovation/growthwill be sub-optimal

with a weakEuropean VC sector

(52%)

Reasons for selling in the secondaries market in the next 2 years – LP views

Re-focus resources on thebest-performing GPs

Re-balance portfoliowithin the

PE asset class

Re-direct resourcesto other asset

classes or uses

Increase liquidity

0% 20% 40% 60%10% 30% 50% 70%

Respondents (%)

(Figure 17)

(Figure 16)

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PIK debt issuance is a sign of a frothy credit market, LPs think

Three quarters (74%) of LPs think the current level of payment-

in-kind (PIK) debt issuance is a sign of over-exuberance in the

credit markets.

Most LPs are comfortable with the current level of dividend recaps

Two thirds of LPs think today’s level of dividend recaps is

appropriate at this point in the PE cycle.

LPs’ views on today’s volume of dividend recaps

LPs’ views on the current level of payment-in-kind (PIK) debt issuance in the credit markets

(Figure 20)

(Figure 21)

Billionaires’ futuristic tech-based ventures are ‘rich men’s vanity projects’, say LPs

The majority of North American and European LPs believe the

financing of futuristic technology ventures (such as asteroid

mining and the LA-San Francisco Hyperloop) by billionaires are

largely ‘rich men’s vanity projects’.

North American LPs European LPs0%

20%

30%

10%

40%

60%

50%

80%

90%

70%

100%

They are largely ‘rich men's vanity projects’

Resp

onde

nts

(%)

They are a spur to potentially valuable innovation

(Figure 19)

LPs’ views of billionaires funding futuristic tech-based projects

It is not a sign ofover-exuberance

(26%)

It is a sign ofover-exuberance

(74%)

Balance sheets are stilltoo conservative –

there is potential for aneven greater amount ofcapital to be returned

(9%)

Level of recapsis creatingproblems

for the future(26%) Level of recaps

is appropriateat this pointin the cycle

(65%)

W I N T E R 2 0 1 3 - 1 4 11

Respondents by region

(Figure 22)

Respondents by year in which they started to invest in private equity

Asia-Paci�c(16%)

Europe(41%)

NorthAmerica(43%)

$20bn-$49.9bn(17%)

$10bn-$19.9bn(12%)

$5bn-$9.9bn(7%)

$50bn(26%)

$1bn-$4.9bn(18%)

$500m-$999m(11%)

Under $500m(9%)

Bank/asset manager(31%)

Public pension fund(18%)

Corporate pension fund(4%)

Insurance company(17%)

Government-owned organisation/SWF

(9%)

Family of�ce/private trust

(6%)

Corporation(4%)

Other pension fund(2%)

Endowment/foundation(9%)

Before 1980(5%) 1980-4

(12%)

1985-9(17%)

1990-4(14%)

1995-9(25%)

2000-4(17%)

2005-13(10%)

Respondents by total assets under management

(Figure 23)

(Figure 25)

Respondents by type of organisation

(Figure 24)

Coller Capital’s Global Private Equity Barometer

Respondent breakdown – Winter 2013-14

The Barometer researched the plans and opinions of 113

investors in private equity funds. These investors, based in

North America, Europe and Asia-Pacific (including Middle

East), form a representative sample of the LP population

worldwide.

About Coller Capital

Coller Capital, the creator of the Barometer, is the leading

global investor in private equity secondaries – the purchase of

original investors’ stakes in private equity funds and portfolios

of direct investments in companies.

Research methodology

Fieldwork for the Barometer was undertaken for Coller Capital

in September-October 2013 by Arbor Square Associates, a

specialist alternative assets research team with over 50 years’

collective experience in the PE arena.

Notes:

Limited Partners (or LPs) are investors in private equity funds

General Partners (or GPs) are private equity fund managers

In this Barometer report, the term private equity (PE) is a

generic term covering venture capital, buyout and mezzanine

investments

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